Share-options plans in Russia: Reasons to be careful

There are many international businesses operating in Russia. Many encourage their employees to assume increased responsibility and, accordingly, to gain improved results, motivate their employees by implementing incentive schemes in the form of share-option plans. Share-option plans are used widely in Russia, but there are certain complexities involved in their structure and this note highlights some of the key issues to be aware of.

The process of setting up an incentive scheme in the form of a share-option plan in Russia brings to light certain difficulties relating to Russian securities regulation.

As a matter of practice, share-option plans in Russia are structured through the acquisition of foreign securities. However, Russian law, prevents offering foreign securities (unless they are listed in Russia) to non-qualified investors, which employees generally are.

A further difficulty is that Russian labour law does not recognise share-option plans. As a result, share-option plans are usually deemed to constitute bonus payments by state authorities and, therefore, state authorities consider that Russian labour law rules should apply. This leads to the imposition of certain restrictions upon payments made pursuant to share-option plans. In particular, according to the Russian Labour Code, bonuses must be paid out promptly to an employee as/when they are awarded and, thus, an employer is not entitled to block its payment for a certain period. Yet another difficulty arises because the Russian Labour Code limits the portion of employee salary payments (including bonuses) which can be paid in non-monetary form to 20 per cent of the respective payments.

Non-compliance with any of the above mentioned rules may be considered to be a violation of Russian law and thus entail negative consequences for the employer. Such negative consequences would solely depend on the nature of the violation, but may include fines imposed by relevant state authorities and/or claims by relevant state authorities/employees seeking to recover a monetary amount equal to the value of shares provided under share-option plans.

Since 2011, a slight liberalisation trend has been observed in Russian regulation relating to share-option plans. The first step in this direction was the adoption in April 2011, of Order No. 11-8/pz-n by the Federal Service for Financial Markets (the securities market regulator). Although formally there is still a prohibition at the federal legislative level in relation to offering foreign securities, the Federal Service for Financial Markets responded positively to the possibility of employees acquiring foreign securities not-listed in Russia in the framework of their employment.  However, there are still amendments and clarifications required to fully legalise share-option plans in Russia.

HSF Moscow's recent experience is that Russian authorities are paying increased attention to issues relating to the implementation of share-option plans. Although, in a particularly recent case, HSF Moscow successfully demonstrated that no share option violations were in place and investigations by Russian authorities produced results which were in favour of our corporate client, every company operating in Russia should continue to take particular care when structuring its share-option plan given the potential negative consequences which may arise due to problems in Russian legislation and the formalistic approach of Russian state authorities.

This article has been written by Marat Agabalyan and Ivan Teselkin from  Herbert Smith Freehills' Moscow office.,